New East Asian institutions could challenge the global economic order

Intra-regional economic interactions in East Asia were broadly compatible with the global liberal order from the late 1970s into the mid-2000s. Despite many national barriers to incoming trade and investment, more were coming down than going up. World Trade Organization (WTO) and International Monetary Fund (IMF) rules and norms generally prevailed. The World Bank and the Asian Development Bank (ADB) adhering to longstanding global standards were the key sources of infrastructure loans. An array of challenges to that congruence between global and regional trade and finance have arisen within East Asia, particularly since the global financial crisis (GFC) of 2008-09 and the current Covid-19 pandemic. New institutions of trade and investment threaten to compete with one another and with existing global institutions in ways that pose challenges to the existing global liberal order and threaten the competitive opportunities for non-Asian corporations from both Europe and the United States. Whether policy-makers there can respond effectively to offset these challenges is a central question for near-term action.

Intra-regional economic interactions in East Asia were broadly compatible with the global liberal order between the late 1970s and the mid-2000s. The main engines of trade and investment were corporations headquartered in the United States and the European Union as well as in Japan, Korea, Taiwan, Singapore and Hong Kong as they searched for cheaper land and labor along with proximity to final markets. China, together with less developed but labor and resource-rich countries of Southeast Asia, garnered the lion’s share of these new investments. Governments that once limited their economic focus to domestic conditions began embracing regional economic interdependence while corporations took advantage of improved regional transportation and communication links to advance their own capacity to modularize corporate functions. They “moved the product, not the factory,” benefitting from the national economic asymmetries across the region.[1]

The cumulative result was a nexus of ever more complex production networks, investment corridors, growth triangles, and export processing zones that blurred national borders, engendering ever more dense networks of economic interdependence and intraregional trade and investment that now rival those of the EU. The sprouting green shoots of economic development initially rooted in Northeast Asia quickly spread to include Singapore and Hong Kong, later engulfing China and a number of Southeast Asian countries in what is often popularly labelled “the East Asian economic miracle”. Important as links were within East Asia, those links were also open to the outside, particularly to US and European firms. Consequently, in broad-brush terms, such developments built on and fostered the longstanding global liberal order that had been operative since the early years following World War II.

As national economies became more intermeshed with one another, governments simultaneously engaged one another to forge a plethora of new regional institutions. The Association of Southeast Asian Nations (ASEAN) acting as a collective entity, along with middle powers such as Japan and Korea, led the way in fostering the Asian Development Bank (ADB), the Asia-Pacific Economic Cooperation (APEC) forum, the ASEAN Regional Forum (ARF), the ASEAN plus Three (APT), the Chiang Mai Initiative Multilateralization (CMIM), the East Asia Summit (EAS), and other building blocks of a more expansive regional institutional architecture. Equally, governments formed bodies less comprehensive in membership and more granularly targeted at specific cross-border problems such as immigration, environmental pollution, drug smuggling, piracy, and pandemics. A widening institutional matrix began to develop aimed at collective economic development and the resolution of cross-border challenges. Although many of the global production networks (GPNs) that developed in East Asia had few if any Western participants and several of the new institutions such as the APT and CMIM excluded non-Asian members, like the open nature of private corporate ties, a large number of institutions included numerous non-Asian members. Thus, the overall combination of rising economic interdependence and expanding institutional cooperation fostered East Asian financial and economic patterns that built on, and merged comfortably with, the broader global liberal order.[2]

Compatibility between developments in East Asia and the existing global order came under challenge, particularly following the Global Financial Crisis (GFC). These accelerated with the disparate Asian and Western responses to Covid-19. Across much of East Asia, and certainly within China, the narrative flipped from one that stressed the easy fusion of East Asia with globalization to one that argued for their incompatibility. Chinese leaders, in particular, became vigorous in promoting the claim that East Asia is rising, and the West is declining.[3] More explicitly, they have contended that China is leading East Asia’s collective march forward while the US is the biggest anchor around the neck of the sinking West. In that context, they challenge what the West has called “the rules-based order,” claiming that the notion is far from globally acceptable and that China will lead in forging an alternative order.

In this regard, the Chinese regime became more conspicuous in its refusal to adhere to promises made upon accession to the World Trade Organization in 2001, distortions which the WTO was particularly ineffective in disciplining. Policy-makers reversed moves toward market-led reforms and privatization within their borders, instead boosting official investments in the largest state-owned enterprises (SOEs), systematically erecting barricades against penetration of critical sectors by foreign firms,[4] and pursuing industrial policies aimed at ensuring domestic dominance over the technology and manufacture of a multitude of high-tech products from electric cars to spacecraft.[5]

Decades of accumulated economic strength also allowed China to expand its regional financial reach through combinations of foreign aid and infrastructure development projects through its new Belt and Road Initiative (BRI) and its fledgling Asian Infrastructure Investment Bank (AIIB). Economic prowess also allowed China to take advantage of its outsized weight in bilateral trade relations with partners such as South Korea and Taiwan, to weaponize trade in the service of its geopolitical goals. In combination, such actions reflected a heftier China no longer content to contest the rules of the existing order at the margins, but one that was mounting a challenge to its core principles.[6]

The Chinese shift has come at a time when numerous countries in East Asia, and particularly in Southeast and Central Asia, are clamoring for capital investments to expand and modernize their infrastructures. A 2017 study by the ADB, for example, estimated such needs at an astounding $22.5 trillion by 2030.[7] China’s BRI and its AIIB were created to advantageously recycle the country’s burgeoning foreign reserves by serving those regional institutional needs. Not at all tangentially, however, the two institutions also demonstrated a flexing of China’s regional economic muscles in ways that the PRC anticipated would win broader diplomatic and foreign policy accommodation from grateful recipients of China’s investment largesse.

Yet, if China has sought to dominate the funding of infrastructural investments in the region, other countries have pushed back with their own efforts, typically more compatible with the existing global and regional order. Thus, two years after China announced the BRI, in 2015 Japan responded with its own “Partnership for Quality Infrastructure.” Its original pillars were an expansion and speed-up of infrastructure-related assistance through the Japan International Cooperation Agency (JICA) in conjunction with the ADB. In 2016, the original target of $110 billion was raised to $200 billion. To offset the appeal of quick but low quality China-led projects, Japan stressed the principles of quality infrastructure investment, and advanced those principles through a number of fora like G7 and G20.[8] Thus, in September 2019, Japan and the EU concluded a bilateral “Partnership on Sustainable Connectivity and Quality Infrastructure”.[9]

In South Korea, the Moon administration announced a “New Southern Policy” for connecting North and Southeast Asia with physical and digital infrastructure as well as broader societal linkages. Both trade and people- to-people exchanges between South Korea and ASEAN subsequently skyrocketed to unprecedented levels. ASEAN has become South Korea’s second largest trading partner and second largest overseas construction market after the Middle East.[10]

Puzzlingly ambiguous in the protection of the global liberal order has been the U.S. In the area of free trade, the Trump administration abandoned the twelve nation Trans-Pacific Partnership (TPP) and launched a multi-nation trade war that distanced the U.S. from East Asia’s interlaced networks. Yet, as many worried that the Trump actions would mean the death of the TPP and a retreat to national trade blocs, the eleven remaining members demonstrated that they had significant powers of their own.[11] Japan, New Zealand, and Australia led negotiations for a second best countermeasure. A restructured Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), that constituted a high-level trade pact whose provisions went well beyond those of the WTO and expanded longstanding liberal trade principles among its signatories, went into effect on December 30, 2018. There were expectations that other non-negotiating countries might also welcome the opportunity to join. Indeed the UK has filed such an application.[12]

Likewise, ASEAN, with Indonesia in the lead, advanced the fifteen-country Regional Cooperation and Economic Partnership (RCEP), signed in November 2020. Again, the U.S. was absent. Though not as comprehensive as CPTPP, RCEP creates the largest free trade agreement in the world. It marks the first such FTA linking Japan, Korea, and China, and does so under terms more congruent with the liberal trading order than might have been preferred by its largest member, China.

Additionally, Japan, Korea, Singapore and Vietnam have all forged trade pacts with the EU and negotiations for an analogous EU-Indonesia agreement are ongoing. Furthermore, the Republic of Korea entered into a bilateral FTA with China in 2015 that counterbalanced its KORUS bilateral FTA with the US. All of these recent multilateral and bilateral trade pacts reduce regulatory barriers to trade and incentivize countries and companies to engage and/or integrate with a more rules-based and deeper set of regional trade arrangements, all congruent with the region’s interdependent economic order and largely congruent with the longstanding global order. All are evidence of powerful pushbacks against threats to regional economic integration, multilateralism, and intra-state cooperation. All have advanced without significant US participation.

Ironically, such FTAs, while integrative for the participating members by pulling much of East Asia into a closer economic interdependence, in fact weaken the multilateral trade system rather than strengthening it. Large segments of the global economy remain outside these new arrangements because they do not include WTO’s “most favored nation” (MFN) provisions. Therefore, these emerging arrangements present a huge challenge for US firms, in particular, since they now face much higher tariff and MFN barriers across East Asia than many of their rivals. The recent trade moves in East Asia consequently incentivize the US to reengage with a now more interconnected East Asia and to press for collective commitment to the principles of the global liberal order. Although the Biden administration has moved to shore up shattered alliances, they have been slower to reverse many of the Trump era tariffs, and domestic political divisions make it all but certain that the US will not soon join the CPTPP. In a striking irony, China has been quietly negotiating to join CPTPP which, if successful, could leave CPTPP with “China in and the US out,” a direct contrast to the original plans for TPP.

Considerable attention is given by contemporary pundits and policy- makers to the emerging rivalry between Western and Chinese visions for the future. Most often, the emphasis is on the ominous potential for military conflict between the US and China over their competing goals surrounding that future order.[13] At a minimum, there is concern that the US-led global order will be eroded due to a failure of the US to engage economically, financially and institutionally with East Asia in ways that couple regional developments to the existing order. Such fears should not be dismissed out of hand. Indeed, they play out at a far more granular level that may well shape the region in the near term. This competition is unfolding over the rules and norms of investment, trade, production networks, and long-term economic development, issues that play out concerning practical infrastructural pillars such as 5G networks, undersea cables, cyber, power grids, ports, railroads and the like. Which countries with which principles dominate such vital structures of the region’s economy may well prove to be more influential for the future of East Asia than which countries have the largest navies or the longest reaching warheads. Many governments in East Asia have taken actions to shore up the region’s fusion with the global order but their capacity as shapers is limited to the extent that China devotes resources to an alternative order. To this end, it remains to be seen whether the Biden administration can reverse the damage done to America’s standing in East Asia, strengthen its domestic infrastructure, bolster its position in high tech, and reengage economically in the region’s wide competition over the shape and norms of East Asian investment and trade. Doing so would go a long way toward resuscitating the creaking infrastructure on which the global liberal order now rests.


References

[1] See, inter alia, John Ravenhill, “Production networks in Asia,” in Pekkanen, S., Ravenhill, J. and Foot, R. (2014) The Oxford Handbook of the International Relations of Asia, Oxford, Oxford University Press, 348-368; Stubbs, R. (2017) Rethinking Asia’s Economic Miracle: The Political Economy of War, Prosperity and Crisis, Macmillan International Higher Education.

[2] My extended views on this engagement are developed in Pempel, T.J. (2005) Remapping East Asia, Ithaca, Cornell University Press; Pempel, T.J. (2006) “The Race to Connect East Asia: An Unending Steeplechase”, Asian Economic Policy Review, 1(2): 239-254; Pempel, T.J. (2010) “Soft balancing, Hedging, and Institutional Darwinism: The Economic-Security Nexus and East Asian Regionalism”, Journal of East Asian Studies, 10(2): 209-238, inter alia. See also, Calder, K. and Ye, M. (2010) The Making of Northeast Asia, Stanford, Stanford University Press, inter alia.

[3] E.g., Chen, D. and Wang, J. (2011) “Lying Low no More? China’s New Thinking on the Tao Guang Yang Hui Strategy”, China: An International Journal, 9(2): 195–216; Schweller, R. and Pu, X. (2011) “After Unipolarity: China’s Visions of International Order in an Era of US Decline”, International Security, 36(1): 41–72.

[4] In the absence of a level-playing field for European companies, in 2020 the EU enforced a foreign investment screening mechanism to preserve Europe’s strategic interests. The recent agreement on principles of a Comprehensive Agreement on Investments – whose final ratification is far from certain, considering the opposition in the European Parliament – has apparently addressed the issue: European Commission (2020) “EU and China reach agreement in principle on investment”, 30 December, available online

[5] Two 2015 national programs are indicative of that thrust: “Made in China, 2025” and “Internet Plus.” For details see, inter alia, Wübbeke, J., Meissner, M., Zenglein, M.J., Ives, J., and Conrad, B. (2016) “Made in China 2025” Mercator Institute for China Studies Papers on China (2): 74; Wang Z., Chen, C., Guo, B., Yu, Z. and Zhou, X. (2016) “Internet plus in China”, It Professional, 18(3): 5-8; Johnston, A.I. (2019) “China in a World of Orders: Rethinking Compliance and Challenge in Beijing’s International Relations”, International Security, 44(2): 9-60.

[6] A well-cited and harsh argument on this point is Allison, G. (2015) “The Thucydides Trap: Are the US and China Headed for War?”, The Atlantic, 24 September. On China’s changes per se, see for example, Nathan, A.J. and Scobell, A. (2012) China’s Search for Security, New York, Columbia University Press.

[7] Asian Development Bank (2017) Meeting Asia’s Infrastructure Needs, available online

[8] Pascha, W. (2020) “The Quest for Infrastructure Development from a ‘Market Creation’ Perspective: China’s ‘Belt and Road’, Japan’s ‘Quality Infrastructure’ and the EU’s ‘Connecting Europe and Asia’”, International Economics and Economic Policy, 2020 (17):696-700.

[9] The full text is available online

[10] Yeo, A. (2020) “South Korea’s New Southern Policy and ASEAN-ROK Relations: What role does Southeast Asia play in Moon’s foreign policy?” The Diplomat, 28 July, available online

[11] See for example, East Asia Forum (2017) “The next chapter for the Trans- Pacific Partnership”, 26 June, available online; Hawke, G. (2017) “Is the TPP a sleeping beauty or an organ donor?”, East Asia Forum, 25 June, available online

[12] UK Government (2021) “UK applies to join huge Pacific Free Trade Area CPTPP”, 30 January, available online; For a critical view see Ravenhill, J. (2021) “Australia’s Asia-Pacific strategy endangered by UK CPTPP accession”, East Asia Forum, 2 March, available online

[13] See, inter alia, Allison, G. (2017) Destined for war, cit.; Mearsheimer, J. (2010) “The Gathering Storm: China’s Challenge to US power in Asia” The Chinese Journal of International Politics, 3(4): 381-396; Navarro, P. (2006) The Coming China Wars: Where they will be Fought and How they will be Won, Upper Saddle River: FT Press; Tellis, A. J. (2019) “Pursuing Global Reach: China’s not so Long March toward Preeminence” in Tellis, A.J., Szalwinski, A. and Wills, M. (eds.), Strategic Asia 2019: China’s Expanding Strategic Ambitions, Seattle, National Bureau of Asian Research, 3-46.


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